RBA downplays the recent weakness in activity - ANZ

David Plank, Head of Australian Economics at ANZ, suggests that there are reasons to believe that the pace of Australia’s economic activity may have stepped down in a more sustained fashion and in which case, core inflation will remain low, and the RBA’s policy settings may be challenged.

Key Quotes

“The Bank remains upbeat on the global outlook, domestic business conditions, and nonmining investment outside the regions impacted by the mining downturn. The recent decline in iron ore and coal prices has been “as expected.” The forward looking indicators of the labour market are seen as positive for employment growth.”

“On housing, while “prices have been rising briskly in some markets…there are some signs that these conditions are starting to ease.” 

“Statement Details

The commentary around the global outlook is little changed, with “the broad-based pickup…continu[ing].” The substantive change is the reference to commodity prices, with the RBA noting that the “prices of iron ore and coal…have declined over recent months.” Critically, this is “as expected.” On global monetary policy, “further increases in US interest rates are expected over the year ahead.” 

Domestically, “the transition to lower levels of mining investment…is almost complete.” Importantly, “business investment has picked up in those parts of the country not directly affected by the decline in mining investment.” The Bank’s medium-term expectation is unchanged, with “growth…still expected to increase gradually over the next couple of years to a little above 3 per cent.” 

The labour market continued to be seen as “mixed”. While “employment growth has been stronger over recent months…total hours worked remains weak.” Importantly, “the various forward-looking indicators point to continued growth in employment over the period ahead.” Despite this, “wage growth remains low and this is likely to continue for a while yet” and “slow growth in real wages is restraining growth in household consumption.” For the record, we agree with all these views.

On housing, the major change to the Bank’s commentary is the assessment that “there are some signs that [brisk price rises] are starting to ease.” The RBA also notes that “lenders have…announced increases in mortgage rates, particularly those paid by investors and on interest-only loans.” 

On balance, we continue to see the RBA on hold for the foreseeable future. We do, however, think the Bank is underplaying the likely weakness in economic activity in the first half of 2017. We think there are good reasons to believe that the pace of economic growth may have stepped down in a sustained fashion. If this is the case then it will be difficult for core inflation to accelerate markedly from its current level. In which case, the Bank’s policy settings may be challenged.”